Is Green Packet Berhad (KLSE:GPACKET) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Green Packet Berhad (KLSE:GPACKET) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Green Packet Berhad

What Is Green Packet Berhad's Debt?

The image below, which you can click on for greater detail, shows that Green Packet Berhad had debt of RM9.76m at the end of September 2020, a reduction from RM275.2m over a year. But it also has RM36.7m in cash to offset that, meaning it has RM26.9m net cash.

A Look At Green Packet Berhad's Liabilities

According to the last reported balance sheet, Green Packet Berhad had liabilities of RM132.3m due within 12 months, and liabilities of RM1.50m due beyond 12 months. Offsetting this, it had RM36.7m in cash and RM156.7m in receivables that were due within 12 months. So it actually has RM59.6m more liquid assets than total liabilities.

This surplus suggests that Green Packet Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Green Packet Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Green Packet Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Green Packet Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to RM655m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Green Packet Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Green Packet Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM25m and booked a RM81m accounting loss. But at least it has RM26.9m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Green Packet Berhad may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Green Packet Berhad (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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